Taxation and Risk-Taking with Multiple Tax Rates

This paper extends the Domar and Musgrave results concerning the effect of an income tax on risk taking to the case where different tax rates apply to different types of assets. Although the results depend on exactly how the differential tax rates are imposed, as a general matter, an income tax with differential rates can be seen as a tax only on the risk-free rate of return and a fixed ex ante subsidy for purchasing the lower-taxed assets. There are implications for measuring deadweight loss from differential taxation and for spending resources on accurately measuring capital income